De-Leveraging The Eurodollar System In Favor Of Bitcoin

Kane McGukin has 13 years of wealth management experience spanning brokerage and institutional equity sales. He is an independent registered investment advisor.

As the calendar neared September 2021, the money printer had slowed and individuals were beginning to tire from the toils of trading a basket of work-from-home stocks. At this point, COVID-19 was over, the crash was old news and lockdowns were nearing two years old. Most were looking to shift their focus to something new. Something like getting back to what used to be their real day jobs.

inflation, 11.8% now with a peak of 12.74%, the dollar’s return is actually negative as of time of this writing).

Note: actual real estate has been up and quite bubbly in many places in the U.S., though the public market ETF shows negative returns. Likely because public markets are all down and it’s a publicly traded instrument.

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Most assets have been punished since late 2021, as markets began to cool and rates started to reverse their 40-year downtrend.

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relatively unknown (about $14T in 2016), and it was responsible for roughly 90% of international loans in 1997. So, one can assume that eurodollars are the center of most global financial activity when it comes to lending. This is abundantly clear when viewing the eurodollar futures chart below.

received higher interest on the dollars they lent out and also paid a higher level of interest to the rightful, but not actual, owner/holder of the dollars. Given the additional linkages, which lead to more layers of risk, it makes sense that higher interest rates are expected by investors.

These dollars, more or less, became a second derivative of the U.S. dollar.

Definitionally, “Eurodollar futures are interest-rate-based financial futures contracts specific to the Eurodollar, which is simply a U.S. dollar on deposit in commercial banks outside of the United States.”

Wikipedia, 

“Several factors led eurodollars to overtake certificates of deposit (CDs) issued by U.S. banks as the primary private short-term money market instruments by the 1980s, including:

  • The successive balance of payments deficits of the United States, causing a net outflow of dollars;
  • Regulation Q, the U.S. Federal Reserve’s ceiling on interest payable on domestic deposits during the high inflation of the 1970s
  • Eurodollar deposits were a cheaper source of funds because they were free of reserve requirements and deposit insurance assessments”

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So, if the average person needs credit or leverage, it’s generally available one way or another.

Second, if you think about eurodollars as a derivative of the dollar, then it would make sense that you would not want to pay over par (100) to lever-up more than needed. Especially if the internal rate of return was not significantly higher than your borrowing rate. It just doesn’t make mathematical sense.

Last, eurodollar futures are also a gauge for interest rates in that they respond to 3-month Libor interest rates. Since 1981, interest rates have fallen from 16% to near 0% in 2021. As an inverse, the eurodollar rose. Were Treasuries acting as a savings mechanism while the derivative eurodollar was the credit mechanism? During this period, acting as the global reserve currency, the U.S. has largely been the benefactor here.

European countries tried this, only to stop sometime after as they had no idea as to what else might break in the system. Nor did they understand the unintended consequences because it’s never been done before (except in Japan).

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The Role of Stablecoins? Eurodollars 2.0?

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Compound, a Decentralized Finance (DeFi) interest rate protocol. Much less, giving it a rating! That’s a fundamental sign, in my opinion, that cryptocurrency is here to stay, and the financial rails are definitely in transition.

Layered Money.” It’s easy and a must-read.

In addition, we’re currently watching a new parallel financial system being built. That’s the Bitcoin network and it provides an additional and much-needed sound money asset.

stablecoin Terra Luna.

Opinions expressed in this article are not to be considered investment advice. Past performance is not indicative of future performance as all investments carry risk including potential loss of principle.

This is a guest post by Kane McGukin. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

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